Tips, Gratuities and the Tipping Act 2023: Tax Rules and Employer Obligations 2026/27

The Tipping Act 2023: A New Legal Framework

The Employment (Allocation of Tips) Act 2023 (commonly called the Tipping Act) received Royal Assent in May 2023 and came into force on 1 October 2024. It fundamentally changed the legal position for tips, gratuities and service charges in the hospitality and other relevant sectors.

Before the Act, many employers operated tipping arrangements that allowed the business to retain a proportion of tips -- for example, keeping 5-10% to cover administration costs, credit card processing fees, or simply as a contribution to business overheads. This was legal and common practice. The Act ended this.

Under the new regime, all qualifying tips must be allocated to workers in full. The only permissible deduction is income tax withheld under PAYE -- the Act does not exempt tips from tax, it simply prevents employers from keeping any portion before distributing them.

What Types of Tips Are Covered?

The Act covers three categories:

1. Employer-received tips: Tips paid by credit card, through a service charge on the bill, or through any other mechanism where the money first goes to the employer and is then distributed to workers. This is the most common arrangement in hospitality.

2. Employer-controlled tips: Tips nominally paid to a worker but where the employer exercises control over the distribution -- for example, tips collected in a pot that the employer then divides.

3. Cash tips paid direct to workers: Tips given by a customer directly to an individual worker (cash handed over, for example). These are the most straightforward -- the worker receives them directly and the employer has no involvement in the distribution.

The Act covers types 1 and 2. Type 3 (direct cash tips) are not subject to the allocation requirements, though they remain taxable in the hands of the worker.

Employer Obligations Under the Tipping Act

1. Pass Tips in Full

Qualifying tips must be paid to workers in full, with no deductions other than PAYE income tax. An employer cannot withhold any portion for:

• Administrative costs
• Credit card transaction fees
• Shortfalls in other areas
• Any other business purpose

Service charges: Where a service charge is added to a bill and the customer expects it to go to staff (which is the case for most non-VAT-applicable service charges), it is a qualifying tip under the Act. Discretionary service charges that the customer can waive are also covered -- once paid, they must be distributed to workers.

2. Written Tipping Policy

Every employer covered by the Act must maintain a written tipping policy and make it available to all workers. The policy must explain:

• How tips are collected
• How they are allocated between workers
• How the employer ensures fair distribution
• Workers' rights to request information about tip allocation

There is no prescribed format for the policy, but HMRC and ACAS have both issued guidance on what makes a compliant policy.

3. Allocation Must Be Fair

Tips must be allocated fairly between workers. The Act does not prescribe a single method -- employers can choose systems based on hours worked, role, customer feedback, seniority, or other transparent criteria -- but the method must be documented and consistently applied.

The Act also requires that workers are not disadvantaged compared to colleagues of a similar type in a discriminatory way. A tipping policy that systematically directs fewer tips to workers from particular protected groups could give rise to discrimination claims alongside Act violations.

4. Records

Employers must keep records of:

• The total tips collected
• How they were allocated to individual workers
• The dates of payment

Records must be kept for three years from the date the tip was allocated. Workers have the right to request a written statement of their own tip allocation history for any period up to three years previously.

Enforcement

Workers can complain to an employment tribunal if their employer fails to comply with the Tipping Act. The tribunal can order the employer to pay any tips that should have been allocated, plus compensation up to four weeks' pay. There is no cap specified in the Act for the underlying tip amount -- the employer must pay what was withheld.

Tax Treatment: PAYE on Tips

Regardless of the Tipping Act, the tax position for tips has long been clear: all tips are taxable income. The Act does not change this.

Employer-Controlled Tips: Class 1 NI and PAYE

When tips pass through the employer's hands -- including via a tronc managed by the employer -- they are subject to:

• Income tax via PAYE: deducted at the employee's marginal rate when tips are paid
• Employee Class 1 NI: at 8% on amounts between GBP12,570 and GBP50,270 and 2% above
• Employer Class 1 NI: at 13.8% on amounts above GBP5,000

This means tip income is treated identically to salary for tax and NI purposes when the employer controls the distribution.

Tronc Arrangements

A tronc is a separate pool arrangement for distributing tips, operated by a "troncmaster" who is typically an employee (often a head waiter or manager) rather than the employer itself. Where tips pass through a genuine tronc operated independently of the employer, the tax treatment differs:

• Income tax via PAYE still applies (through the tronc payroll)
• Employee NI does not apply to tronc tips (because the payment is not from the employer)
• Employer Class 1 NI does not apply either

This NI saving for tronc arrangements has been a feature of the hospitality sector for many years. Following the Tipping Act, troncs are now more widely used as they represent the most efficient way to distribute tips while complying with the new legal framework and minimising combined NI costs.

For a tronc to be genuinely independent and attract the NI exemption, the troncmaster must have genuine control over distribution decisions. If the employer dictates who gets what, HMRC may treat the arrangement as employer-controlled and apply Class 1 NI.

Cash Tips Paid Direct to Workers

Where a customer presses cash directly into a worker's hand without any employer involvement, the position is:

• Income tax applies (the worker has received taxable income)
• NI does not apply because this is not a payment from an employer
• The worker should report the income through self assessment if they are not already registered, or notify HMRC via their personal tax account
• The employer has no PAYE obligation for direct cash tips

However, if the cash tip is then pooled and redistributed, it may become employer-controlled depending on the arrangements.

How Tips Affect Take-Home Pay

The tax on tips can catch hospitality workers by surprise, particularly where their base salary is at or near the National Living Wage and tips represent a significant additional income.

Example: Maria works as a server and earns GBP24,000 per year in base salary. She receives GBP8,000 in employer-controlled tips during the year, distributed through payroll. Her total income is GBP32,000.

Income tax:

• GBP12,570 Personal Allowance -- tax-free
• GBP19,430 at 20% basic rate = GBP3,886

NI (employee):

• GBP12,570 to GBP32,000 = GBP19,430 at 8% = GBP1,554

Total deductions on GBP32,000: GBP5,440 Net take-home: GBP26,560

Had Maria's tips been distributed through an independent tronc, the tax would be the same (income tax at 20%) but employee NI would be saved on the tip portion (8% on GBP8,000 = GBP640 saving). Her net take-home would increase to GBP27,200.

Compliance Steps for Employers

Employers in hospitality, beauty, transportation (e.g., taxi drivers) and any other sector where tips are common should:

1. Review whether their current tipping arrangements comply with the Tipping Act
2. Draft or update a written tipping policy
3. Consider whether a tronc arrangement is appropriate and tax-efficient
4. Ensure payroll is set up to process tip income correctly through PAYE (or tronc payroll)
5. Set up record-keeping systems for tip allocation covering the required three-year period
6. Brief managers and workers on their rights and the employer's obligations
7. Review any existing arrangements where a portion of tips was retained -- these must stop

The Impact on Casual and Zero-Hours Workers

The Tipping Act applies to workers (not just employees), which means zero-hours workers, casual staff, and agency workers are also entitled to tip allocation. Employers must include these workers in their tipping policy and allocation records.

This is particularly significant for events-based hospitality businesses (weddings, events catering) where casual workers may represent a large proportion of staff on busy days.

Looking Ahead: HMRC Monitoring

HMRC has signalled increased attention to tip income reporting following the Tipping Act. The combination of employer obligations under the Act (written records, three-year retention) and HMRC's interest in ensuring tip income is properly taxed means that compliance is now both a legal employment law matter and a tax compliance matter.

Workers who receive tips outside the tronc or payroll system -- whether cash direct or through informal arrangements -- should ensure they report this income. HMRC can cross-reference tip income with employer records, bank account deposits, and lifestyle indicators.

The Tipping Act brought long-overdue transparency to tip distribution in the UK. For workers, it means more money reaching their pockets from the tips customers intended for them. For employers, it means clear legal obligations, enforcement risk if not followed, and an opportunity to adopt fair and efficient tronc arrangements that benefit both workers and the business.